My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, May 22, 2012

Cottages - Cost Base Additions, are they a new CRA Audit Target?

Canadians have a love affair with their cottages. They enjoy the fresh air, the tranquility, the loons calling out, drinks on the dock, the gathering of friends and family and in many cases; they often enjoy a substantial financial profit on their cottage properties.

When a cottage property has increased in value, it often brings unwanted income tax and estate planning issues. I wrote about some of these issues a year ago April, in a three part series for the Canadian Capitalist titled Transferring the Family Cottage - There is no Panacea. In Part 1, I discuss the historical nature of the income tax rules, while in Part 2 I discuss the income tax implications of transferring or gifting a cottage and finally in Part 3 I discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

Today, I want to discuss the fact that the CRA seems to be looking at cottage sales as audit targets and in particular, they are reviewing additions to the original adjusted cost base (“ACB”) of the cottage.

Income Tax Issues

Before I charge ahead with this post, I think a quick income tax primer is in order. Prior to 1982, a taxpayer and their spouse could each designate their own principal residence (“PR”) and each could claim their own principal residence exemption (“PRE”). Therefore, where a family owned a cottage and a family home, each spouse could potentially claim their own PRE, one on the cottage and one on the family home, and accordingly the sale of both properties would be tax-free.

Alas, the taxman felt this treatment was too generous and changed the Income Tax Act. Beginning in 1982 a family unit (a family unit of the taxpayer includes the taxpayers spouse or common-law partner and unmarried children that are 18 years old or younger) could only designate one principal residence between them for each tax year after 1981.

As if the above is not complex enough, anyone selling a cottage must also consider the following ACB adjustments:

1. If your cottage was purchased prior to 1972, you will need to know the fair market value (“FMV”) on December 31, 1971; the FMV of your cottage on this date became your cost base when the CRA brought in capital gains taxation.

2. In 1994 the CRA eliminated the $100,000 capital gains exemption; however, they allowed taxpayers to elect to bump the ACB of properties such as real estate to their FMV to a maximum of $100,000 (subject to some restrictions not worth discussing here). Many Canadians took advantage of this election and increased the ACB of their cottages.

3. Many people have inherited cottages. When someone passes away, they are deemed to dispose of their capital property at the FMV on the date of their death (unless the property is transferred to their spouse). The person inheriting the property assumes the deceased's FMV on their death, as their ACB.

The Principal Residence Exemption

As noted above, if you owned a cottage prior to 1982, you can make a PRE claim for those years on your cottage. Where the per year gain on your cottage is in excess of the per year gain on your home, you may want to consider whether for years after 1982, it makes sense to allocate the PRE to your cottage instead of your home, if you have not already used the PRE on prior home or cottage sales. In these cases, I would suggest professional advice due to the complexity of the rules. In completing the PR Designation tax form (T2091), there are cases where you may need the ACB and FMV at December 31, 1981, but I will ignore this issue for purposes of this discussion.

Putting together the pieces of the ACB Puzzle

So how do all these rules come together in determining your ACB? First, if you owned your cottage prior to 1972, you will need to determine the FMV at December 31, 1971 as that is your opening ACB. If you purchased the cottage after 1971, but before 1994, your ACB will be your purchase cost plus legal and land transfer costs. Next, you will have to determine whether you increased your ACB by electing to bump your ACB in 1994.

If you inherited the property, you will need to find out the FMV of the cottage on the date of the death of the person you inherited the property from. If the property was inherited before 1994, you will have to determine whether you increased your ACB by electing in 1994.

Finally, most people have made various capital improvements to their cottages over the years. For income tax purposes, these improvements are added to the ACB you have determined above. Examples of capital improvements would be the addition of a deck, a dock, a new roof or new windows that were better than the original roof or windows, new well or pump. General repairs are not capital improvements and you cannot value your own work if you are the handyman type. I would argue however, that the cost of materials for a capital improvement would qualify if you do the work yourself.

Unfortunately, many people do not keep track of these improvements nor do they keep their receipts (in addition, I suspect one or two cottage owners may have done the occasional cash deal with various contractors for which there will not be a supporting invoice), which brings us to the CRA, who appear to be auditing the sale of cottages more intently.

I think it was six pages back I said something about a quick income tax primer before I discussed the CRA audit issue :(

The Audit Issue

Anyways, on to the audit issue (or more properly called an information request). Some accountants think the CRA is going directly to cottage municipalities to determine cottages that have been sold and then tracking the owners to ensure they have reflected the disposition for income tax purposes. Others think the CRA is just following up reported dispositions of cottages on personal income tax returns. In either event, we have seen a couple information requests/audits recently.

So once the CRA decides to review your cottage sale, what are they looking at and what information are they requesting?

Amongst other things they are asking you to support the adjusted cost base of the property, by providing the following:

a. your copy of the original purchase agreement stating the purchase price;

b. the statement of adjustments where the purchase of the property involved the services of a lawyer;

c. if the property was either inherited or purchased in a non-arms length transaction, indicate the FMV of the property on the date of acquisition and supply documentation to support your figure. If the property was inherited, indicate the date of acquisition;

d. a schedule of all capital additions to the property. The schedule must indicate the nature of the addition or improvement (i.e. new roof) as well as the cost.

A and B above just provide the CRA the original ACB. Item C is interesting in that where there was a family sale or inheritance, the CRA is asking for validation of the sale price, but surely it is also cross-checking to see if the family member reported the sale of the cottage and in the case of a deceased person, to ensure the terminal income tax return of the deceased reported the value of the cottage at death.

Item D is where the CRA is zeroing in on; the capital additions, which as I noted above, are often not tracked and source documents are often not maintained.

The CRA is also asking for support of the proceeds of disposition, requesting such items as a copy of the accepted offer to purchase, the statement of adjustments and the full name of the purchaser in addition to their relationship, if any, to you (i.e. relative or otherwise).

They are also asking if while owned by you, was the property your principal residence for any period of time. This relates to the discussion above on whether the gain was larger on your cottage than your house and thus you designated your cottage. The CRA will then most likely confirm you did not sell any other residence during that time period.

Another request is that if you elected to report a capital gain on the property in 1994, they want you to supply a copy of the form T664, Election to Report a Capital Gain on Property Held at the end of February 22, 1994, that was filed with your 1994 income tax return. This is interesting since many people have not kept their older tax returns and I don’t think the CRA keeps its returns that far back. I am not sure what the CRA is doing in cases where taxpayers have destroyed their elections.

In conclusion, if you have sold a cottage in the last couple years, make sure you have all your documentation in place should you receive an information request, and if you currently own a cottage, use this road map to ensure you have updated your cottage ACB and have a file for any documentation needed to support that ACB.

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information of a general nature. These posts should not be considered specific advice;
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Please contact a professional advisor prior to implementing or acting upon any
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When I have had this situation, I have typically gotten appraisals. Property tax assessments are often not reflective of FMV. However, as you state, you would think that the CRA would trust the value of a municipality. The safe bet is an appraisal. If you go with a property tax assessment, the CRA may or may not accept it, so you take your chances.

If my aunt transfers the title of her cottage to me and pays the capital gains based on ACB and FMV, what documentation do I need that this has been paid so that if I ever sell the cottage in the future I only have to pay capital gains from the time she transferred it to me? Thank you.

You will obviously want any legal documentation reflecting the transfer of the ownership of the property. It may be worthwhile to also have ther lawyer draft a deed of gift, but speak to the lawyer about that. You should also get a copy of the valuation your aunt is using to determine the FMV of the property and if she is willing, get a copy of her s(3) from her tax return this year reflecting the sale.

Thanks for the great info. I'm going through my parents' estate and dealing with the family cottage situation now. According to the person I just spoke with at Revenue Canada they can look in their archives to find out if a T664 election was made which was a big relief in my case.

I cannot comment on your case specifically as certain elections may have been made, but generally, unless you elect otherwise, there is no deemed disposition or any tax consequences upon the transfer of capital property to your ex if the transfer is in settlement of marital rights.

Although there are typically no income tax consequences, you acquire the property at the original cost base and thus inherit any paper capital gains on the growth of the value of the cottage, however, that should have been explained to you by your lawyer and/or accountant.

Hi, my father built our cabin in Manitoba, on leased land within a provicial park. Purchase was in 1973 and completed cabin 1974. Does this mean there are no capital gains he would have to pay if he gifted it to me since it was purchased prior to 1981?

It depends. Assuming he had a home he also used as his principal residence, you can only claim one PRE post 1981, so your accountant would need to do some calculations to see where it is best to allocae the PRE post 1981,to the cottage or his home or some combination. Actually somewhat complex unfortunately.

Hi Mark, He has/had a home as the principal residence. You mentioned in your article that the spouse could claim the cabin since it was purchased prior to 1981, so guessing dad claims the house, mom claims the cabin...no capital gains? I will ask him to contact his accountant. Would be nice if CRA would simplify this... Thanks, John

A couple of questions....in your experience, will the CRA accept a reasonable estimate of the cost of materials used for a capital improvement if receipts are missing? We thought our property would be our forever-cottage and neglected to keep receipts for the first two years when we did the bulk of the major work. And, secondly, if both spouses are named as owning the property, can the capital gains be split or allocated to the one with the lower income? In this case, the wife is a stay-at-home mom with no income. Thanks so much.

I bought a lot and cabin in 1986. I just sold the cabin to someone who will move it as I am building a house on the lot. Do I have to pay capital gains on the value of the cabin,the cabin and the lot, or neither? I am building a cabin on the same lot and intend to retire there.

Yes, the cost would include the land and the building, I don't know hat you mean by assessed as the cost is only relevant when sold unless u r talking about the assessment for property tax in which case I have no expertise

So, if one did the $100,000 thing in 1994 and sells their cottage this year, does the cost of improvements (new roof, water pump, deck etc) decrease the tax paid on capital gains or increase it? Does it matter if improvements were made before or after 1994?

Your cost base in 1994 would have included the cost of improvements. So if your cottage cost $100k and reno's were $75k, the cost was $175k. If the FMV was say $275k in 1994, you could have bumped up your cost to $275k give or take some other rules. Thus if you sold this year for $325k your gain would only be $50k ($325-$275).

Your 1994 new cost, say $275k would then be increased by any improvements post 1994

Do you have to have actual receipts for all improvements? I bought the house in 1988 and it was my principle residence until 1995. I moved to the US for work and kept the house as a summer home, but not my principle residence. I made improvements, new roof, new windows, new siding, paved driveway all after 1995. I have all ready gotten a FMV appraisal for 1995 of 95K and purchased the house for 69K in 1988. I sold the house last year for 320K. We could only claim 2012 as principle residence again. I am in the process of trying to figure out how much I owe.

My parents gifted me a cottage in 1995. I now want to sell it. I have no idea what the ACB would be. Both parents are deceased and I have no record of the FMV at the time of the gift. What are my options for trying to come up with a value that will satisfy Revenue Canada?

Your question raises more issues than you probably want to hear about.

Unless your parents claimed the principal residence exemption on the cottage, they should have reported a capital gain (assuming one) when they gifted you the cottage in 1995. So if you have access to their old tax returns, check the returns to see (a) if they reported the gain and (b) what the amount is.

If you cannot find the returns or they did not report the gain (I will leave this issue alone), you need to obtain a valuation for the property in 1995. Sometimes your real estate agent can do this for you or you may have to hire an appraiser or if you are a good researcher, you may be able to somehow find the info yourself. In any event, you need some kind of documentation of sales of similar properties in the area.

My brother and I own a cottage that we were given by our mother 20 years ago. I will never use it due to geographic location and he and his family spend much of the summer there. I would like to give him my half of the property. Is my gift considered disposal and subject to capital gains tax? If so, is there any way to minimize the tax?

I purchased some vacant land as an investment in 1981 for $7,500 and sold it in 2013 for $64,000. Since there was no election made in 1994 I presume that my ACB will consists of my original cost ($7,500) plus any outlays made at the time of purchase ie. legal fees and land transfer taxes plus I understand I can add the amount of municipal taxes paid during the period of ownership. The property was a joint ownership between my wife and myself, can the capital gain be split and half of the gain reported on our individual tax return? We were not aware that we could file an election in 1994, could you briefly explain how our capital would have changed if we had filed.So two questions 1) can we add the municipal taxes to ACB 2) can the capital gain be split Thank You

I hate to be the bearer of bad news, but you have a somewhat more complicated situation. The issue is whether your gain is on account of capital or income.

Firstly, in the CRA's guide on rental income they say the following: You cannot deduct your mortgage interest and property taxes for vacant land if you are not earning any income from that land. Also, you cannot add these expenses to the adjusted cost base of your land.

Thus, it appears you may not be eligible for the realty tax adjustment to your ACB. But your larger issue is that the disposition of vacant land is often considered income not a capital gain. If it was held as inventory (which vacant land is generally thought to be held as until one starts building on it or earns some rental income from it) then you may be entitled to add the property taxes to the cost of the inventory but it would be an income gain. If the land was just held as and investment and nothing was done to the property before it was sold the CRA would probably argue the property was held on account of income.

This is way to complex for a blog answer, so I suggest you engage an accountant. If you dont feel the cost is worth it and file as a capital gain, you may or may not be reassesed.

Please dont ask any follow up questions, as I have given you all I am willing to provide on a blog.

Could inflation value be included in adjusted cost base?Let us say the cottage was purchased for $100,000 in 1997In 2013 adjusted for inflation this translates to $130,000 (based Bank of Canada Inflation Rate)For Capital Gains calculation what is the Adjusted Cost Base: 100K or 130K$

My mother owned two homes. Her primary residence and a second home which I lived in and did not pay rent. It was not a rental property. I had the kitchen renovated all the invoices are in my name and I paid for all the renovations myself. Can these improvements be added the ACB of the home? Thank you.

my grandparents purchased a cottage in 1971 and have owned a home since before then until 1996. my grandpa claimed PRE on the home from 1971 to 1996. they separated in 1996 and my grandfather retained ownership of the cottage. my grandpa passed in 2013. if my grandpa claimed the PRE on the house from 1971 to 1981, can he claim the PRE on the cottage from 1971 to 1981 as well on behalf of my grandma if she no longer has ownership. it would make sense that her ability to use the PRE on the cottage should cover some of the gain but i'm confused by who should claim it.

Great information, thank you. My question is whether my Mother who resides in Texas can create an Alter Ego trust (she is over 65 years) or does she need to be a Canadian resident. Also value your opinion on how to obtain FMV on property as of 1971 since cottage was originally perchased in 1964 for peanuts and is now quite valuable.

I grabbed this off the internet "Under an alter ego trust, the settlor transfers his or her property to a trust which provides that the settlor alone is entitled to receive all of the income of the trust and no-one else can receive any of the income or the capital of the trust before the settlor’s death. To qualify for an alter ego trust the settlor must be over 65 and a resident of Canada. "

as for 1971, can be problematic. Some appraisers have historical data--see if you can find newspaper at the library from 1971 in area and asking prices of cottages

In 2002, late in life, my father bought a real fixer-upper log cabin within a provincial park. Land was leased, not purchased. He was a fiercely independent pioneer and it was a great project for him through retirement. We have pictures of what it looked like in 2002. Critter infested shell of a cabin. With his own muscle and money he transformed it into a beauty. Paid taxes on all the materials he purchased. Roof, deck, dock, land clearing, stains, sealants, wood preservatives, you name it. It is not winterized and was used only in summer months. He recently passed away and my mother has opted to sell. We can find no receipts but lots of pictures showing him working on it and lots of witnesses along the road. Any guidance on what she is looking at with respect to position with CRA? She is 66 and giving up a chunk to capital gains is a harsh burden when she is counting on the sale to provide long term income.

Very problematic unfortunately. Maybe have a contractor come look and provide you an estimate of what he thinks the renovations would have cost. Not sure what else to tell you; you will be at the mercy of the CRA, so hopefully whatever cost you come up with, they dont audit the gain

My ex-husband just recently bought me out of my half of our recreational property five years after our divorce. What, if any, issues could arise out of this transaction? Can condo fees be used to calculate adjusted base?

This is far too complex an issue to answer on a blog. You should seek professional advice. Sorry but I have had this issue before and there are several potential issues depending upon was the property actually purchased by your ex or was the property transferred pursuant to your settlement

When selling a cottage fully furnished do we ask 2 separate prices - one for the cottage and the other for the furniture? Do we have to include the sale of the furniture as a capital gain or just the cottage?Also, if we are missing receipts but have the contractors name, approx date and the amount do you think CRA would accept that? Contractor has not kept his receipts from that far back.

It has been my experience that the CRA wants an invoice and providing a name, date and approx. cost will likely be problematic.

As for the furniture, you could do it inclusive or exclusive of the cottage, typically done inclusive. I have not given it much thought, but the furniture would probably be considered personal use property and there will probably be minimal to no gain on the furniture component.

It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:

a) the income–producing use is ancillary to the main use of the property as a residence;b) there is no structural change to the property; andc) no CCA is claimed on the property.

These conditions can be met, for example, where a taxpayer carries on a business of caring for children in the home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with business or employment. In these and similar cases, the taxpayer reports the income and may claim the expenses (other than CCA) pertaining to the portion of the property used for income–producing purposes

My cottage was acquired before 1972. A T664 was filed with FMV of $70K. In 2013 the property sold for $190K. What is used to determine the ABC? $70K + expenditures + !! = CG? I requested a copy of my T664 and the conversation with CRA left me questioning my understanding the formula.

The T664 was used to elect on a capital gain in 1994. That gain plus any original ACB became your new ACB. On the form is a column new acb, that is your cost for purposes of the sale (so maybe $70k or higher, but confirm with the actual form). That cost plus improvements will be your cost base as you note correctly.

I purchased a cottage in the year 2000 for $165K and put $80K into it with improvements with receipts. I want to now demolish the cottage and re-build a more solid structure for $200K. How do I calculate the adjusted cost base on a demolished cottage for capital gains should I want to sell it?

You can allocate your principal residence exemption between your home and your cottage or use on just one of the properties, but you cannot double up. The idea is to use the exemption on the property with the larger per year gain. This is complicated and you should engage an accountant to assist you, as there various factors to take into consideration including whether you elected in 1994 on your cottage.

I have a couple of questions on taxes for cabin property sales, as my dad sold the family cabin this year. He made the election to revalue in 1994, so we are starting with that as the ACB. While he maintained it meticulously, there is nothing much that I think could be considered an improvement that could be added to the 1994 number.

Here are my questions:

1. It was sold with all furnishings and equipment, but most things out there were retired from family homes in the city, not new. The sale price would likely have been a little lower without the contents, but I have no actual support for that claim. Should we just let this item go?

2. My dad is concerned about minimum tax. Is this an issue with selling a long-held property like this?

3. He files a paper return. Are copies of supporting documents acceptable, or must they be originals?

I am ok responding to comments as long as manageable although I may stop shortly because of tax season..

1. Yes, I would probably let it go considering they were used and you have no documentation.

2. Minimum tax has nothing to do with the number of years he held the property. Typically he would not be subject to minimum tax when he has a taxable gain and tax to pay, but there are many variable in the calc.so I cannot provide a definitive answer.

3. Do not provide any documents. Only prepare the schedule 3 and keep the documents if asked, do not provide anything voluntarily.

My two sisters and I are joint tenants with right of survivorship of a family cottage that was transferred to us by my mother in 1994. It was appraised then at $50,000. My question is on Capital Gains upon the death of the first of three. Does the first transfer of ownership to the remaining two people trigger a Capital Gain for estate of the deceased ? If so, does a new apparaisal need to be done upon the death of each of us ?

I sold my cottage in 2013 .I did have the appraisal done in 1994 ,.excellent report that stated a value of $215K.Can I bump the ACB by the $100K, (1994) to then reflect a valuation of $315K?

I do have capital additions and improvements invoices (cannot find them all) but can support to a tune of $70KI included contents in the sale where I do have bills for another $13K.NET proceeds from sale $570K.Here is the question......LOLIs this the right calculation.215+ 100 + 70+ 13= 398 ACB minus 570= $172 the declare Capital gain?

I dont provide personal tax advice on the determination of your gain on this blog.

I am unclear whether you made the actual election in 1994. If you did, then the new ACB was noted on that form and that is the starting point. If you did not make the election in 1994, then you cannot bump the value. The rest of your calc. in general seems correct but I can not provide a definitive answer on this blog.

My father filed a T664 in 1994 for his cottage. FMV was $70,000.00 and sold for $155,000.00 in 2013. He request a copy of T664 to help with(unfortunately could not locate his copy) ABC. He has been waiting for over two months to receive a copy from CRA. Anything we have read does not explain how we can calculate without this information. His return has been ready to submit for the last month....any suggestions on what can be done would be most helpful. Much appreciated.

We have had trouble getting T664 forms from the CRA as they are very old and not necessary easy to access if they are even still maintained by the CRA.

If your dad remembers what he elected for in 1994, I would just go with that number as the ACB. Hopefully the CRA will then find the original and if it is different than your dad remembers you can just amend the return. If they dont find a copy and challenge his gain (unlikely but possible) I am not sure what happens as in theory they have the record of the bump, but you dont have documentary proof, so not sure who wins out.

Sorry, I cant really help, you are missing way too much info. If this was my client, I would probably file giving my best estimate of a cost and then amend the return later when I could properly determine the gain.

2.10 Another requirement is that the housing unit must be ordinarily inhabited in the year by the taxpayer or by his or her spouse or common–law partner, former spouse or common–law partner, or child.

2.11 The question of whether a housing unit is ordinarily inhabited in the year by a person must be resolved on the basis of the facts in each particular case. Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person. For example, even if a person disposes of his or her residence early in the year or acquires it late in the year, the housing unit can be considered to be ordinarily inhabited in the year by that person by virtue of his or her living in it in the year before such sale or after such acquisition, as the case may be. Or, for example, a seasonal residence can be considered to be ordinarily inhabited in the year by a person who occupies it only during his or her vacation, provided that the main reason for owning the property is not to gain or produce income.

Thank you very much. If the principal residence is sold in 2010 and the fmv of the cottage is 100,000 at that time, but the cottage is sold in 2013 for 150,000. Do we calculate cap gains from purchase date to 2010 (date deemed PR) this 100,000 less acb., Or is is 150,000 less acb eventhough it is deemed PR for those 3 years

Unfortunately, it is not as simple as you would like it. This is a very complex calculation based on years you have owned the cottage, years it is your principal residence (since you may have allocated many of those years to the house you sold in 2010). I would use an accountant the year you sell, as I even have trouble with this calculation.

I wrote this guest post a couple years ago which may help explain things a little http://retirehappy.ca/your-principle-residence-is-tax-exempt/

My husband and I bought my parents family cottage in the early 2000's. ($70,000) The cottage is an owned building on leased land in an Ontario Provincial Park. The leases are set to expire in 2017 unless a miracle of a lease extension comes through. The terms of the lease are such that when the lease expires we are responsible for removal of the structure at our own cost.

My question is: Can we claim a capital loss? If the leases expire in 3 years, we won't technically be selling the cottage, just removing a building. I have all the original paperwork, of course, registering ownership and transferring lease in the LTO.

Situation is husband and wife purchase cottage post 1994, both contribute to purchase price but not equally, and cottage is put in wife's name.

Cottage is to be sold soon, but bank records showing purchase price contributions from either spouse are long gone, and bank (upon request) cannot provide old statements.

I thought capital gain should always be allocated between the husband and wife based on their contribution percentage, however, you mention in one comment above that if cottage is in both husband and wife's names, gain is shared 50:50?

In this case cottage is only in wife's name, so:

1. How would CRA expect the gain to be allocated, and 2. If gain was split between spouses in some manner, and the bank records no longer exist, upon audit how would CRA typically assess the situation?

My comment about 50/50 is in the context that either it is truly owned 50/50 or that people just report on legal ownership and not what is actually contributed,even if right or wrong.

I do not provide personal tax planning on this blog so I will not answer your question. If you have an accountant, speak to them, if not, hire someone for a 1/2 hour consultation, I know if I was your accountant what I would tell you (BTW, I dont take on personal clients, so please do not email me and ask).

Mark - very helpful series and I've learned a lot. I live in Boston, MA and my elderly parents want to transfer their cottage in northern Ontario to me before one or both of them die. The original structure was built by my grandfather in the 1940s and used by him and later by our family for many years until it became decrepit and we razed it and rebuilt brand-new in 1996-97 for a cost of about 100K CN (we have the majority of receipts from construction to support this cost). We had an appraisal done several years ago that found it was worth close to 200K CN. Assuming that figure more or less holds, if my mother were to transfer it to me now, can you tell me what I'm looking at as far as a tax hit (which I would have to pay as my parents do not have the money)? Also, is the transfer treated differently if it involves an American vs Canadian citizen? (I recently gained my Certificate of Canadian Citizenship by virtue of my mother having had to give up her Canadian citizenship in the '60s to get her US citizenship, so I could use that if it were helpful).

I don't provide personal tax planning advice on this blog. All I can say is that in general, it is sales by non-residents that are problematic; typically sales to non-residents are less problematic.

The tax owing would be based on your mothers and fathers marginal income tax rates or whomever legally owns the cottage. Your worst case scenario would be around $23k in tax on a $100k gain, however, it sounds like your parents don't have much money and thus, their rate may be lower and the tax much lower.

I purchased my parents cottage in 93 or 94. I own a house in the city. If I sell my city home, I will use PRE. If I move to my cottage, does it become my Principle residence? And then when I sell it eventually, can I use PRE again.? Does it matter if the tax roll calls it seasonal residence, even though I can live there 4 seasons?

The use of the PRE is very complicated when you have a home and cottage and way beyond the scope of this reply. You should have an accountant help you determine the best use of the PRE when you sell your home; which may include some use for the cottage and some for your home. Once you move into the cottage, it can become your principal residence from that point forward (as noted above, you may be better subject to the facts to claim your cottage as your PRE for some years after 1994). The fact it is called seasonal makes no difference. In any event, again, this is a very complicated issue and get some help before you allocate the PRE to your home and cottage

Father transfered 90acre land to me in 2002. The FMV was 100k but it was transfered at 75k. The current evaluation is 150k (90k for the land and 60k for the building). FMV is 225k What if I demolish the cabin and build a 300k chalet with amenities and sell the total for 450k. What would be my capital gain in theory?

I do not provide personal tax planning on this blog and in particular, demolition is a complex subject, you need to engage an accountant. That being said, your cost base upon the transfer from your dad is $75k, I will not comment any further.

HI BBC. My parents have sold their house in Montreal and would like to pay the capital gains and save the principal residence exemption for the cottage also in Quebec. The question is that since they have relocated to Ottawa (drivers licence, OHIP, etc) and will be filing as a resident of Ontario can they still use the Quebec cottage as their principal residence from a tax perspective? Thanks for your great postings and help.

A property qualifies as your principal residence for any year if it meets all of the following four conditions:

•It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.•You own the property alone or jointly with another person.•You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.•You designate the property as your principal residence

HI BBC,My wife and I have a 'family' principal residence purchased in 1980, but in 2005, we purchased a condo in a different city, same province so I could live and work there (wife stayed in the 'family' residence during this time). Condo has just sold. If I designate the condo as the principal residence for this period of 10 years, there is no capital gains or income (difference between purchase and sale price) to report to CRA?

When we ultimately sell the 'family' residence, we determine capital gains by the ratio of years of condo ownership/years of family residence ownership against the selling price - adjusted cost base of the purchase price?

I dont provide personal tax planning advice on this blog, but I would suggest you may want to engage an accountant if you dont have one to ensure you make the correct choice. In general you should be determining which property has the largest yearly gain before you arbitrarily designate the condo as your PR.

The exempt portion of your family residence is calculated as:

The capital gain on the sale of your homemultiplied by The number of years you have lived in your home (i.e. designated the home as your principal residence as some years may be allocated to your condo) plus 1divided by the number of years you have owned the property

WE sold our cottage in 2014 for $290,000.00. In 1994 our ACB was $125,000. Since 1994 we made several additions and alterations. What can we claim as expenses to reduce our Capital Gains - self-labour? materials - furniture for new sunroom and appliances, etc. Can we get a list somewhere? Thank you for any help you can provide.

Hello BBC, Is the capital gain on the sale of a secondary residence gain taxed as income or is 50% of it taxed at the taxpayers tax rate? The reason I ask is that there seems to be the notion that if we used the cottage personally then it does not qualify for capital gains treatment. Thanks in advance.

Thanks for this informative forum. My situation is this; My spouse and I purchased a house in 1981 as tenants in common. 50% ownership. In 1995 I moved and purchased anothe property which is now my PR. He continued living in the original house until 2014 when we sold the property. During that time he did not pay rent, just his share of the property taxes and insurance due. He had health issues and could not work. The gain on the house is substantial. I am claiming 50% ownership and 16/33 PRE and have a few receipts for capital improvements. Any other suggestions on how to minimize this substantial tax bite? Many thanks.

Technically the appliances are separate and do not form part of the adjusted cost base. The furniture would probably be considered personal use property and subject to the PUP rules. Practically people seem to lump everything together.

HiI live in ManitobaI owned a house for 20 years and it was my permanent residence for those years, I sold the house in 2014Before I sold the house I bought a cottage in 2012 since selling my house I now live at the cottage and would like to have the cottage as my permanent residence. Do I have to claim capital gains?thanks

If you claimed the PRE on your house, you cannot claim the PRE on the cottage for the same years. So some portion of the cottage will be taxable, likely either one or two years of ownership depending upon the facts when you sell it. When you sell, I would get tax advice to maximize your PRE claim.

HiWe built our cabin 8 years ago on 5 acres. We recently sold for a fair amount less than it cost to purchase the raw land and build the cabin. Can we claim a capital loss on the land and/or building?Thanks!

HiThe family cottage was owned by my grandmother and father. Upon her death a FMV was determined and ownership changed to my father. At the time of his passing the cottage was only in his name. A FMV was determined and title was then changed to his spouse, my mother. Ownership was then at the same time changed to joint with my mother and myself. When calculating the capital gain for my mother, the proceeds of disposition would be 50% of the current FMV but when calculating the ACB would it be: (1) FMV determined when my father was sole owner plus improvements since then at 50% and the balance to be calculated upon her passing or (2) FMV and improvements at 100% now and then any more improvements added to the ACB at the time of her passing (and using the FMV at that time as well) to calculate the other 50% of the capital gain? Thank you

I do not provide personal tax planning advice on this blog. Also, the transfer to your mother would likely have been tax free at your dads adjusted cost base which you do not appear to be factoring in.

Thank you. I'm trying to determine the correct way to calculate a capital gain. I realize it is tax free ACB between spouses but when a property is "deemed to be sold" (as in transfer from parent to child), does the ACB, in this case the mother, not go back to the original ACB of the spouse when calculating the capital gain?Also can the adjusted ACB for all improvements be added when calculating 50% of a capital gain (If so, any future improvements could then be added when the other 50% is calculated i.e. other parent's passing)?Thank you. Your blog is very informative.

As I stated from the start I do not provide personal tax advice. I have provided some general comments, you need to provide all the facts and details to an accountant who can review your specific situation, but in general, gifts of property to a child are a deemed disposition at fair market value and the gain is measured from ACB of the person making the gift-- I will not comment any further, as stated above, speak to an accountant about your specific situation.

Mr Counter :), We are considering gifting the cottage to our son. We purchased it back in 1992 and have never determined a FMV. Is the cra concerned about what type of real estate appraised is used to determine the fair market value ? would you include cottage toys such as 4 wheel quads, boats and toys that would normally be sold when you disposed of a cottage. Is there a maximum the cra will allow for the ACB?

Anon, the CRA expects a proper valuation by a qualified person. You want a valuation that can stand up if challenged. The toys may be personal use property, which are subject to a different set of rules. You should engage an accountant to review your situation before you gift the cottage, it is an important decision and needs to be done right, so engage an accountant if u don't already have one.

Hi. If a property was owned since 1989, and the capital gains inclusion rates changed several times until it was sold in 2014, Is the current inclusion rate of 50% used to calculate the gain or do we have to go back and value the property at each date the inclusion rate changed?

Hi, I wonder if I can include the transportation cost (by air) in the ACB as my personal use property is overseas. Same for the proceeds of disposition, may I include that since I need to travel back to sell the property. Thanks!

Thank you for the awesome blog. I am just trying to wrap my head around what is obviously complicated. For my illustration I am just going to pick figures out of the air.

So say a couple buy a cottage pre-1971.. lets say in the 1950's for $6500 and spouse one dies in 2000 and the value of the cottage was $106,500 and spouse 2 dies in 2016 and the cottage is worth $206,500.

couple also own a house which is say bought in 1983 and still owned at second persons death. I am assuming that this becomes the principal residence and cancels out the capital gains on it.

Is this sort of how it works.. $6500 day 1, 1971 value = 56,500 1982 value is 66,500

So is it for spouse #1 - 1/2 $106500 (53,250) - 1/2 the 1971 value $56500 (28,250), so gain in value is $25,000 but tax for be on 1/2 that or $12,500 ?

or does the 1982 date come into effect in any way shape for form ?

then I think the value gain after the 1st spouses death is 100% to spouse #2 so she will have the capital gains of $62,500

I am further getting from you blog, that trying to sell the 1st house before spouse 1 passed away, if the family was trying to keep the cottage will mean that the only value increase escaped is the value increase from the time the principal house is sold and the spouse dies ?

Aka you cant sell the house in 2015 in my example, then have spouse #2 principal residence shifted to the cottage and when they pass away suggest her portion of the capital gains has been avoided ?

I am brain dead from tax season, way too complicated to answer, sorry. Even if I was not brain dead, to determine the optimal situation in these circumstances often takes hours and are always fact specific. No there is no easy answer

Hi, If an Ontario resident owns a cottage in Quebec, does the Ontario will for transfer of estate apply to the cottage in Quebec or is a separate will required? It seems the ideal is to sell the cottage at FMV with a take back mortgage so the vendor can stage the gain over 5 years and avoid the will across jurisdictions?

Our parents bought land in 1977 for $14,500 ( for which there is a receipt). They then built a cottage and did not save any original receipts, although handwritten lists of some of the expenses were made. In 2003, a professional appraisal was done, and in addition to providing FMV, it also provided a cost analysis for the construction of the cottage. Which would the CRA accept more readily, the handwritten lists or the cost analysis provided by the appraisal? ( For improvements after 2003, e.g. Dock, well, etc., there are receipts.)

I cannot speak for the CRA. It more likely depends on the auditor assigned to the file if your issue is reviewed. I would think the cost analysis would be better, but that may still not be accepted, as there are no official receipts. Hopefully you are not audited and dont have to find out.

I recently sold my house/primary residence in Toronto, retired and moved to my long-time cottage, the cottage is now my new primary residence. When the cottage changed from being my secondary to primary residence, would this have triggered a capital gains at the time of change, or will the capital gain happen when I eventually sell in the future?

I do not provide specific tax planning advice on this blog as I may be missing facts. In general situations, if the cottage has never been rented and has been a personal asset there is no gain. However, you should speak to an accountant to make sure you maximize your principal residence claim between your house and cottage this year when you report the sale.

Don't know if this has been covered, a more unusual situation: cottage (personal use property) burned to the ground a few years ago. Given that insurance premiums paid over many years were not deductible and insurance settlement not taxable, can I add cost of rebuilding cottage to prior ACB when eventually sold? Accountant thinks it logical...

When calculating the ACB on a cottage are we allowed to add the cost of renovations / additions that are done to the cottage during the years that it is designated as the principal residence. Example own cottage from 1990 - date of sale in 2015 , Principle residence designation on cottage from 2001-2015, addition constructed in 2012 .

I never specifically looked into this, so I cannot give you a definitive answer. However, since the gain for all years is allocated/designated amongst the PR years and the non PR years, it would conceptually make no sense to exclude certain costs.

Hi BBC - When selling a property at arms length to another individual without a realtor, an appraiser was hired to determine the FMV. Can the cost of the appraisal be included as a deduction from the sale proceeds for the purpose of determining the Capital Gain?

Hi BBC:My mother-in-law recently sold her cottage. Unfortunately, she did not keep her 1994 T664 and the government could not find their copy when we requested it. However, they did send us summary information which showed a taxable capital gain on property of $8250. The cottage is the only non-residential property she has ever owned. Also she does have a piece of paper from 1994 on which she has a calculation of the capital gain amount she believes she claimed in 1994. The amount is 11000 and this conforms to the taxable capital gains on property as per the summary provided by Revenue Canada once one takes in the 75% rate applied on capital gains at the time (i.e. $11,000 times 75 percent is $8250). Do you think this is sufficient 'evidence' to include the $11000 as part of her ACB when she files?

Mark: It is stunning that you have been getting questions on this topic for over 4 years now. (PS - good topic for a new book for you to write!)However, in reviewing all the discussions, I have not seen anything on my situation:My wife purchased the cottage property in 2002 and it is still in her name. We built a shed on the property in 2003. We started building the cottage in 2005. We hired some local labour during 2005, 2006 and 2008 to assist us in the various stages of construction. We have kept probably 90% of the material and labour receipts since that time. We are still buying materials to complete the cottage. (This summer will be the drilled well). We are well aware that none of our labour can be counted as any value. There will come a time in 20 years were we may have to sell the cottage (or die and it now becomes an inheritance issue) so we are trying to make sure we have good records of our purchases / expenses to have a cost basis of the cottage when its real estate value is finally set to determine the capital gains.Since we are not yet into the replacement costs of anything yet (ie - replacing the roof) so everything is still really adding to the cost of the cottage.We have four questions:1) How good do our receipts have to be? We have a spread sheet recording each receipt we kept. However, looking back there are some obvious items that we lost the receipt on ie - insulation material and the outside siding. Any idea how CRA would look at the few items we obviously have in the cottage but lack a receipt on if we put a stated value on them at the time they would have been purchased?2) We have kept a separate list of tools we have purchased for building and maintain the cottage: ie - ladders, electric tools, portable generator, chain saws... Would any tools be claimable? 3) Does the cottage need to be in both names in order to split the future Capital gains on our income taxes?4) Should we or can we get any of our records pre-certified by CRA as acceptable?Thank you.Rick

1) How good do our receipts have to be? We have a spread sheet recording each receipt we kept. However, looking back there are some obvious items that we lost the receipt on ie - insulation material and the outside siding. Any idea how CRA would look at the few items we obviously have in the cottage but lack a receipt on if we put a stated value on them at the time they would have been purchased?

A: it depends upon the auditor, but lately the CRA has become much tighter in respect of receipts so I would not count on non receipted items being allowed but would still initially claim them

2) We have kept a separate list of tools we have purchased for building and maintain the cottage: ie - ladders, electric tools, portable generator, chain saws... Would any tools be claimable?

no, I have not seen the CRA allow these costs

3) Does the cottage need to be in both names in order to split the future Capital gains on our income taxes?

the answer is generally yes, however, depending upon how the funds were contributed, there could maybe be a case of attribution. You would need to provide specific funding details to an accountant to review for an answer, I cannot provide a definitive answer

4) Should we or can we get any of our records pre-certified by CRA as acceptable?

If there is no receipts for the capital additions to the property. for example invoice of roof changing, extending the driveway, upgrade the kitchen and so on. Is there other solution to support the cost?

Hi, I purchased land in 2006 and built in 2012-2014. I currently rent the cottage for approx. 15 weeks per year with income of less than $30k annually. This just covers costs. We spend as much time there as possible but rent to defray the cost of ownership. I expect to sell our home in the city next year and will make the cottage our principle residence from that point on and possibly continue to rent it but for fewer weeks. What impact does renting the property have on capital gains at the cottage? Thank you!

Hi. I have a cottage on native land, purchased in 1999. Someone has suggested to me that I could be claiming some or all of the land lease payments as deductions against income tax Since I pay over $6000 a year in lease fee, and a further $900 for service fees, I'm really rather interested in this. The cottage is not an income property, and the lease stipulates it can't be used as such. There are restrictions in place about how much time per year I can stay there, but I can't remember the details. At the moment we don't spend much time there, and are thinking of selling because the costs are becoming so high. I would really appreciate you telling me if I'm barking up the wrong tree. Thanks so much

i have a cottage and a house, if i sell the house and claim it as my main residence for tax exemptions and i move into my 4 season cottage as my residence, live there for next 20 yrs, when does this cottage/residence become my primary residence or does it at all??

After you sold your primary residence and move into your cottage, it becomes your new principal residence. When you sell it, the years you live in the cottage (plus 1) divided by the years you owned the cottage will likely be tax free depending upon all the facts.

I have lived in my cottage as a principal residence for 6 years but have owned it for 24 years. I lived here every summer with my children prior to making it my PRE. Before living at my cottage I had a house with my exhuband and my parents but we separated 6 years ago and I got sole title to the cottage. Upon selling the cottage would any capital gains be owing?

Can legal fees and land transfer tax (acquisition costs) be added to the Cost Base when calculating CG on the sale of a second personal-use property? Also, can I deduct legal fees and real estate commission from sale price?

I would suggest you will have little to no chance of the CRA allowing the form to be amended 23 years later. But who knows, you could try. I only have an electronic tax software version (and cant find an original actual form) and the form we used asked what was your cost, how much did you elect and then provided a new acb. I assume you are reading the form correctly but would double check with your accountant, as the form was a bit confusing to read from what I recall.

I have asked the CRA for a copy a couple times and never received one. I do not know if the CRA still has the paper copies or they have been destroyed. I would start with the accountant who prepared the form

Is it possible to elect to increase the adjusted cost base on a cottage without selling it? We bought a cottage in 2000 and have made improvements to it totalling about $80,000 for which we have receipts but some of those receipts are fading with time and whatever ink is used to print them. I would like to get the ACB adjusted so that I no longer have to keep the receipts. Also, most of the work was done by my husband I know we cannot claim anything for labour but we have kept all receipts for an addition we put on the cottage - no matter how small an item if it was for the addition we kept it. Do we have to defend those receipts?

Unfortunately you cannot increase the ACB without selling the cottage. Just photocopy the receipts before they fade. Receipts for improvements your husband did are fine, it is just the labour that is excluded.

We own a cottage on leased land in SK Lease is for 20 years of which there are only 10 left. If we sell ( or gift to daughter) do we have to include value of land as it is not under our control and there is always possibility lease might not be renewed ? Or do we just use value of building for capital gains ? Property prices have increased substantially but cottage has not. Thank you

I bought a cottage in 1997 and did not but a house until 2000. So for those three years can the cottage be my principal residence? Further, I got married in 2002, so if we sold the cottage today, would the capital gain be split between my spiuse and I? At least for the gain from 2002 until now?Thank you

the cottage would qualify as your PR until you bought the house. After that you need to discuss your specific situation with an accountant to understand the best result based on your specific situation and subsequent marriage

We have recently built a new cottage and will be triggering a deemed disposition by changing title from my wife's name to joint. CRA do not appear to offer any clear guidance on what construction costs can be included in the ACB, and I am wondering if "transportation" costs for building materials can be included (ie/ at the per KM rate that moving expenses are allowed). The cottage is remote, and there were considerable KM's driven hauling lumber, fixtures, tiles, paint, etc. to the site. We have kept a spreadsheet of the dates and KM driven.

First of all I am not sure you have a deemed disposition on the title change to a spouse, speak to your accountant. I have not seen anything from the CRA on transportation costs in respect of a cottage, so I cannot provide you guidance.